The coronavirus-related economic effects and government's stimulus package is projected to widen budget deficit to 10 percent of the GDP in the fiscal year 2020 (ending June 2020), from 8.9 percent in the fiscal year 2019, says Moody's Investor Services.
Moody's in its latest report stated that Pakistan's financing needs will rise because of coronavirus-related economic effects, and the government's Rs1.2 trillion ($7 billion, 2.7 percent of the GDP) stimulus package, approved on 30th March.
The stimulus provides tax concessions for households and businesses, including the export and healthcare sectors, and direct cash handouts to support socially-vulnerable and low-income earners laid off because of the coronavirus outbreak.
"Consequently, we expect the stimulus to widen the government deficit to 9.5-10 percent of the GDP in fiscal 2020 (ending June 2020) from 8.9 percent in fiscal 2019, despite strong revenue growth narrowing the deficit in the first half of fiscal 2020," stated in the report.
Moody's further stated that the G20's recent offer of debt relief to low-income countries would also support Pakistan by deferring principal and interest payments on bilateral debt due between May and December.
The deferrals may be extended and involve other creditors.
Debt relief by official-sector creditors would provide additional but very modest spending capacity for Pakistan, whose interest payments on foreign-currency debt are around 0.6 percent of the GDP for fiscal 2021, with about one-third owed to bilateral creditors and another one-third owed to the MDBs.
Although official-sector debt relief would provide some additional fiscal capacity, the G20 has also called on private-sector creditors to offer comparable relief on a voluntary basis.
"Missed or delayed payments of contractually-obligated interest or principal owed to private-sector creditors constitute a default under our definition. Even cases in which issuers and investors agree to revise the legal payment terms will constitute a default if, in our view, the revised terms represent a diminished obligation relative to the original promise", Moody's stated.
Moody's projected that general government debt will rise to around 87 percent of the GDP by June 2020, from around 83 percent in June 2019, and gradually decline in subsequent years.
In fiscal 2021, the deficit is projected to narrow given the government's commitment to fiscal consolidation under its International Monetary Fund (IMF) programme, but remain wide at eight percent-8.5 percent of the GDP.
Further, Pakistan's real GDP is projected to contract modestly by 0.1-0.5 percent in fiscal 2020 (the country's first annual recession), with the economy gradually recovering to grow by more than two percent in fiscal 2021.
Moody's stated that the IMF and official creditor support lowers Pakistan's financing risk amid coronavirus economic shock.
On 16 April, the IMF approved disbursement of $1.4 billion (0.5 percent of the GDP) to Pakistan (B3 stable) under its Rapid Financing Instrument (RFI).
The financing supplements assistance of $588 million (0.2 percent of the GDP) committed by the Asian Development Bank (Aaa stable) and the International Development Association (IDA, Aaa stable) to support Pakistan's response to the coronavirus outbreak.
Additionally, G20 creditors offered Pakistan bilateral debt relief.
The substantial financial support from official-sector creditors reduces Pakistan's financing risks, stated in the report.
The multilateral development banks' (MDBs) latest financial assistance augments their current funding to Pakistan in programmes including the IMF's Extended Fund Facility and the World Bank's Revitalising, Innovating, Strengthening Education project. Moody's expects the extra funding to cover the government's additional external financing needs in fiscal 2020.
The report further stated that the government revenue in the first half of this year rose almost 40 percent from a year earlier, with tax revenue up by 18 percent and non-tax revenue more than doubling in part because of higher profits from the central bank.
Nevertheless, tax revenue is likely to contract in the second half compared with the year-ago period, although higher-than-budgeted central bank profits, lower-than-budgeted interest payments and fiscal savings from lower oil prices will mitigate the effect of the contraction on the deficit.
Although the country's export sector accounts for just nine percent of the GDP and tourism accounts for just two percent of the GDP, the nationwide lockdown from 1 April to month-end (with a possible extension) to curb the coronavirus will significantly curtail domestic consumption and pose downside risks to economic growth, which threatens a wider fiscal deficit and a higher government debt burden than we currently project.
Despite the month-long lockdown, the government allowed labour-intensive industries such as agriculture, construction and textiles to resume operations on 15 April, which should aid a gradual recovery in domestic consumption.
The central bank's cumulative 425- basis-point policy rate cuts since the start of 2020 and facilities to ease the liquidity crunch for businesses and provide cheap loans to the industrial and construction sectors further buffer the economic shock related to coronavirus, stated in the report.
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